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Kirtsaeng II: Fees in Copyright Cases Depends on Reasonableness of Litigation Position

Summary

In its second opinion in the copyright dispute between Kirtsaeng and book publisher Wiley & Sons, the Supreme Court of the United States has ruled that attorneys’ fee awards under 17 USC § 505 should be largely left to the discretion of the district courts to "make a particularized case-by-case assessment" without relying on a presumption one way or the other.

In Depth

Under 17 USC § 505, a “court may … award a reasonable attorney’s fee to the prevailing party.” However, when deciding whether to award attorneys’ fees under the Copyright Act’s fee-shifting provision, 17 USC § 505, the Supreme Court of the United States held that a court should give “substantial weight to the reasonableness of [the losing party]’s litigating position, but also tak[e] into account all other relevant factors.” In an opinion delivered by Justice Elena Kagan for a unanimous Court, the Supreme Court vacated the decision of the US Court of Appeals for the Second Circuit that affirmed the district court’s denial of petitioner Supap Kirtsaeng’s motion for attorneys’ fees from respondent Wiley & Sons. Kirtsaeng v. John Wiley & Sons, Inc., No. 15-373, (June 15, 2016) (Kagan, Justice) (Kirtsaeng II).

In remanding the case back to the district court, however, the Supreme Court made clear that it was not suggesting that the district court had reached the wrong conclusion when it denied petitioner’s motion for fees. Rather, the Supreme Court noted that while the US Court of Appeals for the Second Circuit properly calls for district courts to give “substantial weight” to the reasonableness of a losing party’s litigation positions, it has, at times, suggested that a determination of reasonableness raised a presumption against granting fees. This had the effect of turning “substantial” weight into more nearly “dispositive” weight. For that reason, and in light of the Court’s further guidance in Kirtsaeng II, the Supreme Court remanded the case to give the lower court the opportunity to reconsider Petitioner’s fee application for more than $2 million in attorneys’ fees accrued from victoriously defending against Wiley’s claim of copyright infringement in the earlier iteration of this same dispute. Kirtsaeng v. John Wiley & Sons, Inc., IP Update, Vol. 14, No. 9 (Kirtsaeng I).

Kirtsaeng I

Kirtsaeng I began when Supap Kirtsaeng, a citizen of Thailand attending an Ivy League university in the United States, figured out that Wiley & Sons, an academic publishing company that sells textbooks in the United States and foreign markets, sold its virtually identical English-language textbooks in Thailand at a considerably lower price than the price in the United States. Kirtsaeng arranged for his family and friends to buy the English-language textbooks for him in Thailand and then resold them to students in the United States for a price below Wiley’s US price, but higher than the Thai price, thereby earning Kirtsaeng a profit. Wiley sued Kirtsaeng for copyright infringement. Kirtsaeng invoked the “first-sale doctrine” as a defense—a doctrine that enables the lawful owner of a book to resell or otherwise dispose of it as he or she wishes. But Wiley argued that the doctrine did not apply when a book was manufactured abroad, like those Kirtsaeng had resold.

Whether the first-sale doctrine applied to the resale of foreign-made books was an unsettled legal issue among the courts. In fact, the first time the Supreme Court addressed this issue in Costco Wholesale v. Omega (2010), the Court divided 4 to 4, adding to the uncertainty. In Kirtsaeng I, the district court rejected the application of the doctrine to foreign-made books, as did the Second Circuit in a divided opinion on appeal. In a 6-to-3 decision, the Supreme Court in Kirtsaeng I established that the first-sale doctrine allows the resale of foreign-made books, just as it does with respect to domestic ones. Kirtsaeng was vindicated, and with this victory, returned to the district court and invoked §505 of the Copyright Act seeking attorneys’ fees.

Kirtsaeng II

Relying on Second Circuit precedent, the district court gave “substantial weight” to the “objective reasonableness” of Wiley’s claim and concluded that Wiley’s position was not only objectively reasonable but Kirtsaeng proffered no basis to “override the substantial weight accorded to the objective reasonableness of Wiley’s claim.” The district court found that neither the factual allegations nor the legal theory on which Wiley’s copyright claim was based were objectively unreasonable, acknowledging that Wiley’s claim “persuaded this Court, the Court of Appeals, and three Justices of the Supreme Court.” Imposing a fee award against a copyright holder with an objectively reasonable litigation position, although ultimately unsuccessful, would not promote the purposes of the Copyright Act. The Second Circuit affirmed and Kirtsaeng appealed to the Supreme Court (IP Update, Vol. 15, No. 5).

Section 505 grants courts wide latitude to award attorneys’ fees. However, “in a system of laws discretion is rarely without limits” and “[w]ithout governing standards or principles, such provisions threaten to condone judicial ‘whim’ or predilection.” In Fogerty v. Fantasy, Inc., the Supreme Court established a “pair of restrictions” for district courts tasked with evaluating whether to award attorneys’ fees even though the Copyright Act “clearly connotes discretion.” First, a district court “must make a particularized, case-by-case assessment” rather than “award[] attorney’s fees as a matter of course.” Second, “a court may not treat prevailing plaintiffs and prevailing defendants any differently; defendants should be ‘encouraged to litigate [meritorious copyright defenses] to the same extent that plaintiffs are encouraged to litigate meritorious claims of infringement.’”

Although both Kirtsaeng and Wiley rejected the position that Fogerty spelled out the appropriate limits on judicial discretion, both called for “[c]hanneling district court discretion towards the purposes of the Copyright Act.” They just differed on how to achieve this goal. Wiley argued that “giving substantial weight to the reasonableness of a losing party’s position will best serve the Act’s objectives.” Kirtsaeng “favor[ed] giving special consideration to whether a lawsuit resolved an important and close legal issue and thus ‘meaningfully clarifie[d]’ copyright law.”

To evaluate between the two approaches, the Supreme Court started by reiterating the “well settled” objectives of the Copyright Act, which “serves the purpose of enriching the general public through access to creative works” by “striking a balance between two subsidiary aims: encouraging and rewarding authors’ creations while also enabling others to build on that work.” The Court explained that fee awards should encourage the types of lawsuits that promote these objectives. With this in mind, the Supreme Court ultimately found that the “objective-reasonableness” approach, advocated by Wiley, is better at encouraging litigation that promotes the benefits of the Copyright Act, is more administrable, and treats plaintiffs and defendants more even-handedly than Kirtsaeng’s approach.

First, the Court found that the “objective-reasonableness” approach encourages parties with strong legal positions to stand on their rights and deters those with weak positions from proceeding with litigation. Conversely, when a party has an unreasonable litigation position, the likelihood that he or she will have to pay two sets of fees discourages legal action by deterring the lawsuit or incentivizing quick settlements before costs mount. Kirtsaeng’s approach, on the other hand, “would not produce any sure benefits” because predicating fee awards on whether a lawsuit resolved an important and close legal issue “could just as easily discourage as encourage parties to pursue the kinds of suits that ‘meaningfully clarify[y]’ copyright law.” Indeed, “the hallmark of hard cases is that no party can be confident if he will win or lose.”

Second, the Court noted that the “objective-reasonableness” approach is more administrable because it asks the court that ruled on the merits of the case to also assess whether the losing party advanced an unreasonable claim or defense—a task courts already do. Kirtsaeng’s approach, on the other hand, is not administrable because courts may not know at the conclusion of a suit whether a newly decided issue will have critical, broad legal significance: “District courts are not accustomed to evaluate in real time either the jurisprudential or the on-the-ground import of their rulings” which “may become apparent only in retrospect – sometimes, not until many years later.”

Third, the Court reasoned that the “objective-reasonableness” approach also treats plaintiffs and defendants even-handedly. Indeed, both plaintiffs and defendants can make reasonable or unreasonable arguments. And no matter which side wins, the district court must still assess whether the losing party’s position was reasonable or unreasonable. The Supreme Court further stated that if a district court does conflate the issue of liability with the reasonableness of the claim or defense in granting fees, then its fee award should be reversed for abuse of discretion.

Finally, despite holding that courts should place substantial weight on the “objective reasonableness” of the losing party’s position, the Supreme Court made clear that the reasonableness of the position was only an important, but “not the controlling [factor]” in assessing fee applications in Copyright cases. District courts “must take into account a range of considerations beyond the reasonableness of litigating positions,” for example “litigation misconduct” or “repeated instances of copyright infringement or overaggressive assertions of copyright claims, again even if the losing position was reasonable.” Indeed, a district court “retains discretion, in light of those factors, to make an award even when the losing party advanced a reasonable claim or defense.”

Practice Note

Although Kirtsaeng II held that district courts should give substantial weight to the “objective reasonableness” of the losing party’s claim or defense, the Supreme Court preserved a district court’s broad discretion in awarding fees under § 505 of the Copyright Act.